Boustead Projects AVM
April 08, 2019 - 11:06pm EST by
2019 2020
Price: 0.93 EPS 0 0
Shares Out. (in M): 299 P/E 0 0
Market Cap (in $M): 279 P/FCF 0 0
Net Debt (in $M): 26 EBIT 0 0
TEV (in $M): 248 TEV/EBIT 0 0

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Sometimes a picture is worth a thousand words:

I predict that earnings will go up, by a lot.  There is also a likely catalyst on the horizon.


But you’re not paying for any of that since shares are trading at only 9.1x LTM earnings.  EV to LTM FCF is just 6.7x. The company just bought some land worth ~$0.19/sh (20% of mkt cap), which I deduct from the EV, as it will quickly become income producing real estate.  These guys run a tight ship and they don’t overpay.


(All figures in Singapore Dollars.  SGD/USD = 0.738. This is a closely-held microcap.  It is ILLIQUID! Some days are better than others though.)


Boustead Projects (BP) was previously written up by VI4life at $0.73 in January 2017 and by griffin in March 2018.  If this idea interests you, definitely read both. I believe the current $0.93 represents the best entry point yet given the massive jump in backlog, a recently-completed flagship development (ALICE @ Mediapolis) that will soon start to generate income, and the fact that BP is finally about to reach the threshold size needed to do a value-unlocking REIT.  If BP got full credit for its real estate, I believe these shares would be worth around S$2.30.


BP basically has two segments.  First, a Design & Build (D&B) firm that both designs and manages the construction of Class-A industrial real estate for MNCs.  They only do the high-margin stuff - construction work is outsourced. This is some of the most advanced industrial space in the world, with leading edge water & energy efficiency, automation, digital everything, etc.  Often, BP will fund construction and thus own the property, while leasing back to the client on 10-20 year terms, and so from around FY10 onwards (FYE March 31st), this has created a second segment: Real Estate (fka Leasing) which collect rents and fees for signing-up tenants.


As noted by griffin et al, the downside on this rental income is well protected.  Current leases are generally below-market. BP gets appropriate commitments from tenants, like minimum investments in machinery and other equipment, and early termination penalties.


Before anyone stops reading, let me note that this is NOT the typical family controlled Asian real estate company that couldn’t care less about where the shares are trading.  The reason BP was spun-off from parentco Boustead Singapore (BS (ticker: F9D)) in mid-2015 was to help focus investor attention on the value of the owned real estate (which didn’t work … more on this later).  The Chairman of BS - who effectively controls both entities - has returned capital to investors where appropriate - mainly through the ~50% payout ratio at BS, and sometimes through buybacks. BP has paid only small dividends thus far, seeking instead to reach critical mass necessary to form its own REIT, which would allow for a massive re-rating of BP’s owned real estate, and pave the way for tax-free distribution of the rent it collects.


Mgmt is excellent.  BS Chairman Wong Fong Fui (aka FF Wong) is a classic rags-to-riches entrepreneur.  After turning around a troubled food company (ticker: QAF), he took control of BS. Shareholders have done well with him: a BS share bought on 1/1/03 would have returned almost 15% per annum via share appreciation, the spin of BP, and dividends from both entities.  And I believe true value creation has been better than that, as I’m arguing that both shares are undervalued.


Mgmt and Board comp is quite reasonable.  Note that FF Wong collects neither a salary nor options from BP as he’s not on the mgmt team or the Board.  His upside here comes purely through his direct stakes of 17% in BP and 36% in BS. BS owns 53% of BP, thus his “look-thru” ownership of BP is 36%.  (If you read/listen to the joint BS & BP annual conf calls (held in late May), you’ll see that he’s nevertheless running the show at BP.)

So why is it cheap?  


The BP spinoff failed to get the hoped-for re-rating for a few reasons.  In 2015, the market looked at the development pipeline for industrial real estate in Singapore and began to (correctly) forecast a near-term peak.  Also, while BP dominates the D&B business for high-end properties, increased competition at the low-end started to pressure margins.


More recently, the surge in backlog was announced right when global markets were melting down last December.  BP’s first ever public sector deal (MSRF) and largest deal ever at S$242M was announced on 12/10/18. The Razer deal (S$100M) was announced on 12/21/18.


(Note that technically, Braddell Road isn’t a “win” - essentially, it’s a rare example of BP building on spec.  But it’s going to be somewhat similar to ALICE, and that project has shown just how much demand there is for such properties.  The location is outstanding.)


I believe that shareholders might also be fatigued.  Mgmt started talking about putting their properties (both wholly-owned and JV-owned) into a REIT back in 2013.  If you go back and read the sellside research from 2014 onwards, you’ll see plenty of predictions that this REIT should’ve been done by now.  (Note that by June 2017 every broker had dropped coverage.)


But mgmt did NOT over-promise.  They never committed to a date. They’ve consistently said that they need a critical mass of ~300k square meters of gross floor area (GFA) worth at least S$700M - and ideally S$1B or more to launch a REIT (this includes 100% of JV-owned properties).  And that came more slowly than a lot of folks anticipated for a few reasons:


  • They sold about S$47M worth of properties in FY13 thinking they got a great price.  If you’ll recall, interest rates hit rock bottom in CY2012 (FY13 started on 4/1/12).  But as fate would have it, cap rates in Singapore continued to go down.

  • Ultra-low interest rates increased competition from Singapore REITs for the funding and ownership of new properties.

  • As many had predicted, construction activity peaked in early CY2017.  


BP began to set-up JVs with deep-pocketed partners in FY14 (e.g. the sovereign wealth fund of Abu Dhabi), and these have allowed BP to pursue larger projects than they ever could before.  But it took time. At ~39,500 SM GFA, ALICE @ Mediapolis  is their biggest completed project to-date in the leasehold portfolio.  Despite being completed on-time, it’s only been finished since last fall.  



How soon could a REIT happen?


As of July 2018, the portfolio comprised 268,000 SM GFA with a value of ~S$790M.  Based on announced contract wins - notably a new regional HQ for Razer (which makes videogame peripherals - the company sees this growing to 337,000 SM GFA by the June Q of 2020.  The previously mentioned land they just bought for S$56.5M is known as the Braddell Road site, will be a wholly-owned project adding another 39,500 SM GFA, and should take the portfolio up to around 375,000 SM GFA by March of 2021 or so.  So, 375/268 * S$790M = S$1.1B. I’m comfortable extrapolating here since ALICE, Braddell Road, and Razer are higher value real estate than the rest of the portfolio, on average.


It’ll probably take a couple years total to fully lease-up ALICE.  We’re ~5 months into that process. BP is in committed and advanced tenant negotiations for over 80% of the building.  Further, premarketing has already begun for Braddell Road and the 30% of the Razer building that hasn’t already been taken by Razer Inc.


So maybe they’ll be ready to REIT in a couple years.  But size isn’t the only consideration. Market conditions have to be right.  The structure needs to allow BP to complete the entire value chain from design to injection into a REIT (ex construction work, of course).  And they need to make sure they can be a strong sponsor with the ability to fund growth.


All that said, mgmt has said they’re committed to realizing full value for its real estate, one way or another.





FY2020, which began on 4/1/19, will be a big year for BP.  Most likely, FY2021 will be as well, because the two biggest projects - MSRF and Surbana Jurong - will take longer than BPs usual time-to-completion of ~15 months due to their size.  I’m pretty sure earnings will at least double during that time.


The big question is whether this surge in backlog is a one-off event or the beginning of a much higher level of backlog & revenues than the ~S$200M per year that we’ve seen over the past decade or so.  I think it’s most likely the latter. While I’m not counting on backlog staying quite this high, I’m guessing it’ll be significantly higher than in the past.


I think these recent wins are the product of two developments, both of which are likely to be in place for some time:


  1. In FY18, the government of Singapore changed its approach for awarding contracts.  Prior to that, awards would go to the lowest bidder. BP positions itself as the quality, not price, leader and thus never bid on anything.  Now, the gov’t considers quality and environmental, health & safety (EHS) track record as well as price. The S$242M MSRF deal was only the third contract BP ever bid on, and they won despite not being the lowest bidder.


  1. BP completed a multi-year process of upgrading its capabilities.  As the company said to me:

“With the development of ALICE @ Mediapolis, we had finally achieved our multi-pronged technological transformation, something that had begun several years earlier.  ALICE is a showcase in this and Industry 4.0, with full integrated digital delivery, 7D building information modelling, drone surveys, prefabricated volumetric construction and a number of leading technological implementations in the industrial real estate sector in Singapore.  In Singapore, the Singapore Government came up with the Industry Transformation Map for the construction industry in 2018, showing the way forward for the industry to transform over the next decade to keep Singapore at the forefront of global developments. We have delivered many aspects of our transformation early and this has kept us a step ahead of competitors.  However, like I mentioned before, investments in these technological transformations are still costly and we expect the returns to come over the medium-to-long term in the execution of projects rather than immediately. Surbana Jurong was certainly impressed with our work in this area, which is very much in line with what they are trying to pursue as an urban and infrastructure consultant.  I would recommend that you also read our inaugural Longevity Report”

3q19 (December 2018 quarter) results:


D&B revenue was S$73.8M up 85% from S$40.0M in 3Q18.  I suppose this could have been affected by some of the recent project wins, but I doubt the impact was significant given that they came so late in the quarter.  (Note that D&B has had bigger quarters in the past despite lower backlog numbers.)


D&B pretax income, however, only rose 28% yoy (6.0M to 7.7M).  3Q18 gross margins were unusually high and made for a tough comp.  As BP explained to me:


our gross profit in any given period is really made up of two components:


  • Gross profit from ongoing projects with corresponding revenue for that given period; and

  • Cost savings (savings from expected project costs) from previously completed projects where the final costs are tallied post project completion and after the defects liability period is over (usually about one year after handover of a project) and where there is no corresponding revenue for that given period given that the revenue was already recognised in a previous period.

So, you can see how the gross margin for a particular period could be lifted up just because of a lot of cost savings which came up from previously completed projects due to timing even though there is no proportional lift in revenue.  It so happened that 3Q18 was one such period. To understand gross margins on ongoing design-and-build projects, we typically see them as being in the mid-to-high single digit range. Such projects could have gross margins potentially boosted into the double digit range should cost savings be unlocked but the quantum varies from project to project and can also only be ascertained at a much later time.”

So if they budget for mid-to-high single digit gross margins, as you can see from the table below, this is one conservative management team!



Real Estate (fka Leasing) revenue was 7.5M, down from 7.9M in 3Q18 due to the expiry of the lease on 85 Tuas South Avenue 1 (formerly occupied by Caterpillar) on 1/1/18, which was the day after 3Q18.  But the good news is that they found a new tenant who moved in on 4/1/19, so 1Q20 will have a full quarter’s rent from this property.


Real Estate pretax income dropped from 3.6M in 3Q18 to 1.4M.  Obviously the vacancy at the above property is partly to blame, but so is the beginning of depreciation charges on ALICE@Mediapolis.  As mentioned, tenants have not yet moved into this large new property, but they will soon, and S$ per square meter will be higher than the current portfolio average, reflecting the very high-end positioning of the building.

Upcoming quarters:


I would expect 4Q19 (ended in March) might be a good quarter for the D&B biz given that work began on the MSRF contract in December.  But as the “recent project wins” table above shows, mgmt is guiding for all these new contracts to impact in FY2020 and beyond. So perhaps 1Q20 (ending in June, reported in early-August) will be when the fireworks begin.


The Real Estate segment will likely have a blah 4Q19 due to the same issues from 3Q19.  As mentioned, 1Q20 should be better, especially if they can get some tenants into ALICE that quarter.  Over the course of the next few years, however, ALICE, then Razer, then Braddell Road should increase rents significantly.  These 3 will add over 98,000 SM GFA to an existing ~275,000 SM GFA portfolio (note this number includes 100% of partially-owned properties).  BP’s effective ownership of this 98,000 will be somewhere around 65,000, and these will all have a higher S$ per SM than the existing portfolio average.


(Notes: Held-for-Sale real estate value is the 3/3/18 independent valuation less S$10.5M for the 6/14/18 sale of Changi North Rise.


Value for JV investments is based on: a) March 2016 independent valuation of the GlaxoSmithKline property, adjusted for market price trends, b) book value for 5 other properties, c) 4% stake in Beijing Tongzhou (in AFS financial assets on the balance sheet, d) own estimates for Continental (Tire) Building Phase 3 and ALICE@Mediapolis.)

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Spike in backlog to likely impact results in June quarter 2019 (but possibly in the March quarter.

REIT or other transaction to close valuation gap on owned real estate.  FYI, industrial SREITs generally trade around 1x NAV, calculated at a ~6.5% cap rate.

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